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Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year...

Aylmer-in-You (AIY) Inc. projects unit sales for a new opera tenor emulation implant as follows: Year Unit Sales 1 99,000 2 113,000 3 123,000 4 143,000 5 88,000 Production of the implants will require $737,000 in net working capital to start and additional net working capital investments each year equal to 20% of the projected sales increase for the following year. (Because sales are expected to fall in Year 5, there is no NWC cash flow occurring for Year 4.) Total fixed costs are $175,000 per year, variable production costs are $316 per unit, and the units are priced at $360 each. The equipment needed to begin production has an installed cost of $8.0 million. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus falls into Class 8 for tax purposes (20%). In five years, this equipment can be sold for about 25% of its acquisition cost. AIY is in the 40% marginal tax bracket and has a required return on all its projects of 20%. Based on these preliminary project estimates, what is the NPV of the project? What is the IRR? (Enter your answer in dollars, not in millions of dollars, i.e. 1,234,567. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.) NPV $ -918132.58 -918132.58 Incorrect IRR 17.49 17.49 Incorrect %

Solutions

Expert Solution

We first calculate the depreciation:
Year Beginning Value Depreciation @20% Ending Value
1 8000000 1600000 6400000
2 6400000 1280000 5120000
3 5120000 1024000 4096000
4 4096000 819200 3276800
5 3276800 655360 2621440
Sale Value 8000000 * 25%
2000000
Since Sale value is less than the book value so there would be no tax on Salvage value

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